UK Endowments
The TEP market
A traded endowment policy, or "TEP", is a with-profit endowment
policy that has been sold by the original policyholder to
another investor before the end of the agreed term of the
policy. These policies are legally assigned to the new owner
who continues to pay the premiums. They are also known as
'second hand endowments'. Once sold, TEPs are legally assigned
to investors who take on the responsibility for the continued
payment of future premiums. The life assurance element of
the policy is not transferred but remains on the original
life assured. When the policy reaches maturity (or the life
assured dies) all the benefits are paid to the new owner.
The TEP market has existed since 1843 but has grown enormously
in the last ten years for these main reasons:
- Most importantly of all, the price obtained for a policy
on the open market is normally well above the surrender
value that would be paid by the life office. Figures from
the Association of Policy Market Makers indicating that
the average sale price is 15% higher than the surrender
value, with some policies fetching as much as a 35% premium.
- It is this differential between the surrender value and
the real value of the policy that creates a low-to-medium
risk investment opportunity for the purchaser of such plans.
- When you purchase a second hand endowment policy, not
only has the original policyholder paid all of the initial
set up costs, but it has participated in at least five years
of reversionary bonuses which cannot be taken away. Add
these to the sum assured and you have "underlying guarantees"
that is the guaranteed minimum pay out at maturity. The
policy will also benefit from participation in future reversionary
bonuses and a final terminal bonus.
- Even when an endowment is underperforming when compared
to the growth rate that was assumed at the outset, it can
bring a good return for an investor not trying to achieve
the same investment target. The performance can also compare
favourably with other low risk will be substantially higher
as investors become increasingly frustrated with alternative
low risk investments such as With Profits Bonds which average
only 6-7% pa and even worse, the deposit accounts which
average below 3%.
Not all endowments can be traded. For starters, unit linked
policies and those linked to pension plans can not be traded
on the TEP market. Nor can those policies that have not been
in force for more than 5 years or at least a third of the
policy term. Furthermore the endowment must have a surrender
value in excess of £2,000. If you have a low-cost, full or
unitised with profit endowment that meets these criteria,
then selling your policy may be a viable option for you.
There are many companies throughout the UK who purchase
and re-sell endowments to investors all over the world. The
popularity TEPs is growing to such an extent that market makers
can't meet the demand. As a result, some market makers are
offering the sellers increasingly higher prices for their
endowments as well as taking steps to speed up the time taken
to complete the transaction.
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